Hi there,
First, can I just say PLEASE do not put cereal in your 3 month old's bottle. He's way too young. I have a four month old, which is my third child by birth, fifth altogether, and seriously, pediatricians stopped recommending cereal in the bottle in like the '70's.
I agree that it may work better to put the baby in your room for a while, at least until he sleeps better.
I also agree that letting him cry shouldn't be an option. I
If you keep them in the same room, try some white noise. A cd with ocean waves, or something like that, could really help both kids sleep, and certainly cushion the blow of the baby crying if the toddler is sleeping. White noise is magic in my house!! My 2 year old loves it as much as my 4 month old, and I only just started putting it in the 2 year old's room when it worked so well with the youngest! So he just started white noise and he turned 2 in October!
Anyway, I wish you the best of luck.
Oh, and I also highly recommend the book "The Happiest Baby on the Block" by Dr. Karp. Good read on getting a baby to sleep longer blocks of time.
:)